Crude Oil: Middle East Stability Continues to be in Focus

Domestic Scenario

India is among the largest energy consumers in the world along with the US, China and Russia. The country meets over 75 per cent of its crude oil requirement through imports. The country’s refining capacity stood at 215 million MT per annum as on April 1, 2013, up 68.87 per cent since 2004-05. It is further projected to go up to 2,64.966 million MT by 2015-16, which means that refiners will have to depend more on crude imports to run the plants. India’s Oil output fell by 7.5 per cent year-on-year.  

International Scenario

Global oil production increased by 1.9 million b/d, or 2.2 per cent. OPEC accounted for about three-quarters of the global increase despite a decline in Iranian output (-6,80,000 b/d) due to international sanctions. Libyan output (+1 million b/d) nearly regained all of the ground lost in 2011. For a second consecutive year, output reached record levels in Saudi Arabia, the UAE and Qatar. Iraq and Kuwait also registered significant increases. Non-OPEC output grew by 4,90,000 b/d, with increases in the US (+1 million b/d), Canada, Russia and China offsetting unexpected outages in Sudan/South Sudan (down 3,40,000 b/d) and Syria (-1,60,000 b/d), as well as declines in mature provinces such as the United Kingdom and Norway. China again recorded the largest increment to global consumption growth (+4,70,000 b/d, +5 per cent) although the growth rate was below the 10-year average. Japanese consumption grew by 2,50,000 b/d (+6.3 per cent), the strongest growth increment since 1994.

Price Trend Analysis

The year started off with the overthrow of the Egyptian government by the military, followed by port workers strike in Libya followed by chemical weapons use in Syria which brought the US to the brink of war. Iran has faced dwindling exports in recent years as countries have banded together to form tight sanctions against them. Even Iran’s top four crude buyers, according to Reuters – China, India, Japan and South Korea – cut crude purchases by 16 per cent in the first eight months of 2013. And surprisingly, China’s manufacturing sector expanded less in September than was estimated.

Syria pushed oil to a two-year high as the possibility of a U.S.-led attack threatened to escalate the Syrian conflict and disrupt Middle East supplies. Syria is right next to Iraq, the second-biggest OPEC producer. The Middle East accounted for roughly 35 percent of the global oil output in the first quarter of 2013.  The crude prices are also guided by the development in the US. The jump in the US jobless claims to the highest level in six months provided the first warning that the damage from the partial federal shutdown is starting to ripple through the economy. Downside pressures on oil prices may also come from China’s data. The world’s second largest oil consumer is poised to post its first slowdown in export growth in three months.

Production & Price Forecast

Forecast non-OPEC liquid fuels production increases by 1.5 million bbl/d in both 2013 and 2014. Growing non-OPEC liquid fuels production contributes to a decline in the call on OPEC crude oil and global stocks (world consumption less non-OPEC production and OPEC non-crude oil production), which falls from an average of 30.2 million bbl/d in 2013 to 29.6 million bbl/d in 2014. EIA projects total OPEC liquid fuels production to decline by 0.8 million bbl/d in 2013 and by an additional 0.3 million bbl/d in 2014. The declines in 2013 mostly reflect supply outages among some OPEC producers, along with an overall decrease in Saudi Arabia's production in response to the increase in non-OPEC supply. EIA estimates that OECD commercial oil inventories at the end of 2012 totaled 2.65 billion barrels, equivalent to roughly 58 days of supply. OECD oil inventories are projected to end 2013 at 2.58 billion barrels and end 2014 at 2.57 billion barrels (56 days of supply). The price of crude oil is expected to remain balanced in the range of USD 117 per barrel on the upside and USD 72 per barrel on the lower side for the year 2014.